Telus subsidiary Telus Digital Experience's IPO brought in a $1.36-billion stock sale. While the company went public in 2021 at US$25 a share, it's share price has dropped and closed at $4.65 on the Toronto Stock Exchange.DARRYL DYCK/The Canadian Press
Telus Corp. T-T chief executive officer Darren Entwistle is in a bind.
Three years ago, the telecom executive launched the first in what was expected to be a series of initial public offerings by selling a portion of subsidiary Telus Digital Experience – formally known as Telus International Cda Inc. – in the largest tech IPO ever done on the Toronto Stock Exchange.
The $1.36-billion stock sale, done in a COVID-19 pandemic market gaga for all things digital, was expected to pave the way for similar debuts from Vancouver-based Telus’s health care and agriculture divisions. For Mr. Entwistle, whose 24 years at the helm make him the industry’s longest-serving CEO, showcasing the value of subsidiaries created as complements to Telus’s core wireless and wireline business was meant to be the final act of an illustrious career.
Reality, in the form of feeble stock market performance, has thrown a wrench in Mr. Entwistle’s plan. Telus Digital’s share price is down 88 per cent since its debut, one of many fallen angels from the pandemic IPO boom.
The CEO now faces a dilemma. A decision that makes all sorts of financial sense – buying back all the shares in Telus Digital for a fraction of the IPO price – would kibosh Mr. Entwistle’s plans for further spinouts. Why would anyone buy the next IPO from Telus after watching investors lose money on the last offering?
The business case for buying back Telus Digital is compelling. The company is in the early stages of a turnaround, after naming a new CEO and reducing its guidance on financial performance for the coming year in August. In a report published Sunday, analyst Daniel Perlin at RBC Capital Markets predicted Telus Digital’s share price would remain “range bound” for the foreseeable future, as investors wait for signs on whether the introduction of artificial intelligence in the sector works to the call centre operator’s benefit, or its detriment.
If Mr. Entwistle believes Telus Digital can get back its mojo, buying out public investors and capturing all the upside that comes with a turnaround makes sense. Telus owns 57 per cent of Telus Digital’s shares and 87 per cent of the votes at its subsidiary.
When pressed on his intentions for Telus Digital, the normally decisive Mr. Entwistle has equivocated. In an early August conference call, the CEO said: “Whilst we obviously have a fiduciary obligation to keep all of our options open, explicitly, it is not our intention to privatize Telus Digital.”
But actions can speak louder than words. Two weeks after the conference call, on Aug. 15, Telus stepped into the market and bought 2.6 million shares in Telus Digital, or 2.3 per cent of the company, for $4.25 a share. In a press release, Mr. Entwistle said: “In response to Telus Digital’s unprecedented valuation levels, we are strategically stepping in to support the share trading activity.”
Telus Digital continues to trade at what the CEO describes as an unprecedented valuation. On Monday, the stock closed at $4.65 on the Toronto Stock Exchange. The company went public in 2021 at US$25 a share.
Telus took its digital division public by first selling a stake to institutional investor Baring Private Equity Asia in 2016 – winning independent endorsement of the division’s value – then staging the IPO in 2021. In August, Mr. Entwistle said he plans to roll out the same game plan for Telus Health and Telus Agriculture and Consumer Goods – two other divisions built though a series of acquisitions over the past two decades.
Separately, Telus’s chief financial officer Doug French recently highlighted the possibility of selling or develop up to 200 company-owned properties valued up to $3-billion, possibly by launching a real estate investment trust. The telecom company clearly sees public markets as a key source of future financing.
Successful IPOs for additional Telus offspring will require a stunning turnaround at Telus Digital, rather than an opportunistic buyback of the struggling subsidiary. If Mr. Entwistle does decide to take Telus Digital private at a fraction of the price the company went public, it’s a sign he has given up hope of doing further spinouts.